Alibaba, Baidu and Tencent are signaling first steps towards a bumpy recovery

Eight months ago, the future of China’s largest internet companies looked bleak. Corona-era lockdowns weighed on sales, and Beijing’s tough tech regulations had scared off even brave Chinese investors. Alibaba, Baidu and Tencent shares fell to some of their lowest levels in several years.

With China’s economy now reopening, the tech giants released earnings reports this week that showed signs of recovery. But the financial results, the first to be released since the end of “zero-Covid” restrictions, also reflected the uneven pace of China’s economic recovery and signaled that while corporate restructuring is underway, it is likely to be difficult become.

Baidu, China’s leading internet search company, and Tencent, owner of ubiquitous messaging app WeChat, both posted double-digit revenue growth in the first three months of the year compared to the same period in 2022, marking the first time in over a year that this has happened the case was you had reached that level.

Sales at Baidu increased by 10 percent. The company announced Tuesday that strong digital advertising sales continued into the current quarter. Tencent on Wednesday partially attributed its 11 percent revenue increase to a rebound in digital payments as Chinese consumers resumed spending after a long dry spell. Tencent, China’s dominant video game company, also benefited from an easing of restrictions on gaming licenses last year after a nine-month freeze.

On Thursday, Alibaba reported that revenue rose 2 percent year-on-year, below analysts’ estimates. Its core online e-commerce and cloud computing divisions reported single-digit sales declines, although online shopping started to pick up again in March, the company said.

The reports followed a turbulent two years for tech companies that have been under Beijing’s tight regulatory scrutiny. In 2020, after Alibaba founder Jack Ma criticized financial regulators for stifling innovation, officials halted the IPO of Ant Group, a financial technology company founded by Mr Ma.

In January, a month after China abruptly lifted its “zero-Covid” restrictions following public pressure, a top Chinese central bank official said the campaign against tech companies was “essentially over”. China’s Supreme Leader Xi Jinping is now hoping the country’s tech industry can be a lifeline for growth. And spurred by an escalating technology competition with the United States, China is keen to bring its beleaguered titans back to life.

“The political worst time for them is over,” said Tian Hou, the founder of TH Data Capital, a data analytics firm in Beijing. “The government now wants to use these internet companies to create more jobs, drive innovation, and catch up with the United States.”

Investors’ initial reaction to companies’ first-quarter results was muted. Baidu and Tencent shares were roughly flat in Hong Kong this week, although both have rallied since October. Alibaba shares fell about 6 percent on Friday but were down about 2 percent on the week.

The fortunes of companies will continue to be tied to the Chinese economy. Local governments are heavily indebted. The real estate sector, long an engine of growth, is faltering. Data released by China’s Bureau of Statistics for April disappointed analysts: Chinese spent more on groceries but seemed to avoid items like cosmetics and cars. Youth unemployment reached a record 20.4 percent.

“People are going on vacation but not spending much compared to pre-pandemic levels,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle, the global real estate and investment advisory firm. “They are cautious because they have little confidence in job prospects and future sources of income.”

Alibaba is in the midst of a restructuring. In March, the company announced a reorganization that saw the company split into six entities. And this week, the company announced a spin-off of its coveted cloud division, which the company said would be completed within 12 months in preparation for an IPO.

The e-commerce giant also said it was considering a public offering for its grocery chain and logistics division after a series of regulatory investigations prevented many promising tech companies from going public.

The collapse of Alibaba, one of China’s most prominent corporate empires, shows the degree of reappraisal in the tech sector. For years, China’s internet companies grew as millions of Chinese went online. Recently, this migration has reached a peak and companies are competing intensely for the same customers.

All three of China’s big internet companies are hoping to tell investors a new story tied to artificial intelligence, the new technology underlying services like ChatGPT that promise to disrupt old business practices.

Daniel Zhang, Alibaba CEO, who will also serve as CEO of Alibaba’s future independent cloud unit, described AI as a technology that “would reshape every aspect of our society.”

Companies hope that investments in artificial intelligence will pay off for their cloud computing units, a technology that forms the basis for AI services. Baidu said its AI cloud division reported its first profit last quarter.

This year, Baidu and Alibaba unveiled artificial intelligence systems similar to ChatGPT developed by Silicon Valley research lab OpenAI. Baidu said it applied for approval for the permit after China’s cyberspace regulator released guidelines for the AI ​​systems in April.

Tencent has made “good progress” with its own AI model, the company announced on Wednesday. The teams planned new AI offerings but didn’t elaborate.

Companies focus their AI services on companies or businesses – also because chatbots with their mass appeal could disrupt China’s firm control over information. Alibaba and Baidu each said more than 100,000 companies lined up to try their artificial intelligence products.

Alibaba, Baidu and Tencent are restructuring at a difficult time. Beijing’s influence on the economy is stronger than ever. Intensified rivalries with the United States have denied Chinese companies access to some of the cutting-edge microchips needed to develop the most advanced artificial intelligence systems. And analysts say a lucrative pool of domestic customers – China’s state-owned companies – are turning away from private cloud computing providers in favor of state-sponsored alternatives.

Recently, US officials have called for Chinese cloud providers like Alibaba to be reviewed for reasons of national security. Alibaba said Thursday that its cloud business declined in part last quarter because a major customer pulled out of its international service for “non-product reasons.”

These difficulties, both in China and abroad, are keeping some investors away, knowing full well that internet companies are unlikely to return to the growth rates they enjoyed a decade ago. Others think they deserve a second look.

“I would suggest forgetting the past,” said Kenny Wen, head of investment strategy at Hong Kong-based asset management firm KGI Asia. “Now they are coming back and we are seeing a gradual improvement. We have to give them a new standard of evaluation.”